Today I am going to write about The New York Times again.
I know. I know. I shouldn’t. I promised to stop taking the Times seriously a while back. But I just can’t stay away. Including the Thursday re-run I wrote about it twice last week. I just can’t help it. Moths and flames.
On Wednesday last the Times published Looking Ahead to the Spend-Down Years. I am honestly not sure how to characterize the topic of the article, other than to say it had to do with retirement and money and cited the work of several clueless academics with evidently too much time on their hands.
The piece was illustrated with creepy but eye-catching computer generated images of a man’s head as he aged. This was explained in the first few paragraphs.
Imagine you’re 30 and trying to figure out how much to save for retirement. You consult a Web site that can show you what you will most likely look like at 65 — and that shows the more you save now, the happier you will look then.
Behavioral-finance researchers are already testing and thinking about such online tools, hoping they will become available in the next few years. Their goal is to help people make better decisions about both accumulating retirement assets and then drawing on them — a process they call decumulation.
So there exist academics who not only think that showing you pictures of happy old you and sad old you is necessary to get you to save, but have gone so far as to build a prototype website that does this. And some academics, possibly the same ones, think we need a new term for spending money in retirement.
I can’t blame the Times for any of that, but I can and will knock them for reverently repeating it all without the slightest hint that maybe the professors have hit the ball just a bit off the fairway this time. Academics are, by design, insulated from the Real World. Media outlets, which is to say the people that write for them, shouldn’t be.
The article meanders on to discuss the “annuity puzzle” that is, why hardly any retirees buy lifetime annuities. You might think, particularly if you are a finance professor, that an annuity purchase, which would guarantee an income for as long as a retiree lived, would be a no-brainer.
I believe that the unpopularity of annuities can be traced to several, fairly obvious, causes. The biggest is probably the desire to maintain a pile of money that could be inherited by children. Runners up include liquidity problems, retiree wealth is often tied up in a house or IRA/401k, and the memento mori aspect of the transaction. A person could probably come up with several other plausible ones with a little thought.
Loss aversion, as suggested by a particularly clueless academic, is not one of them.
One explanation is that for many retirees, the pain of giving up money to buy the annuity trumped the pleasure of ensuring a stream of future income, said Eric Johnson, a professor of marketing at Columbia Business School.
Researchers have already shown that investors experience the pain of financial loss more than the pleasure of financial gain. In 2007, research conducted with AARP and focused on a limited range of ages among retirees, Professor Johnson found respondents were particularly loss averse, and the more loss averse they were, the less likely they were to buy an annuity.
The flaw in this line of thought is, of course, that just about any alternative use for the savings not exchanged for the annuity is more risky than the annuity. An irrational spurning of annuities would more likely be ascribed to a “safety aversion” or perhaps “gain lust.”
Is it just me, or isn’t this pretty obvious?
Johnson concedes that his work is thus far based on not much data, but he is trying to gather more. He hopes to explore his larger theory, that the loss aversion seen in older people is due to (wait for it…) cognitive decline. Or, put in words that a serious researcher would never use, old people do not buy annuities because they are stupid.
Half of people in their 80s suffer from either dementia or significant cognitive impairment that prevents them from making sound financial decisions, Professor Laibson of Harvard and fellow researchers concluded in a 2009 paper. They also found that cognitive decline happened rapidly as people passed age 65, with the prevalence of dementia doubling every five years.
This suggests that any solution that requires older adults to make complicated financial decisions needs to address the fact that “about half the people in their 80s are not up to that challenge,” he said. Possible solutions, he said, include creating new fiduciary standards for retirees’ savings, forcing some sort of annuitization, and having more regulatory oversight of financial products for retirees.
“Forcing some sort of annuitization” is the point at which the Times article crosses over into some kind of Kafkaesque self-parody. I can excuse professor Laibson. He’s spent his life inside hallowed halls and is allowed to suggest that maybe we should force old people to buy annuities for their own good because at their age the old dears can’t think clearly. This in a country that generally lets octogenarians keep driving until they actually kill somebody.
But newspaper reporters, even ones that are, as the author of this article is, primarily bloggers, should know better. Arranging for an adequate income in retirement is a serious subject of great practical importance. It is something that real people in the real world struggle with and for which they could often use sound advice. And these academics are not helping any, something that ought to be quite apparent to any informed professional. But not, it would seem, to the folks at the Times.
[Photo – Kit]